The Unfunded Mandates in Local Governments Financing : Crises Experiences from Estonia

In many countries occur problems from unfunded mandates related to a shift of a function by an upper tier of government to lower rank governments without providing the lower one with financial means to perform these functions. The authors define the unfunded mandates and clarify how they relate to functions, uncovered costs and financial means of municipalities. Then they discuss the connexity principle in order to avoid unfunded mandates and respective functions variations in crises to avoid unfunded mandates. They point to conflicts which stem from allocation, stabilization and distribution activities. In Estonia the development of revenues and expenditures of central and local governments reflect tendencies to cause unfunded mandates especially in the period of crisis from 2009 to 2011. To fight unfunded mandates the connexity principle should be applied for municipal performance of central state functions and compulsory municipal functions. The central and local government finances should vary according to the principle of parallelism. If the total tax revenues vary the changes of block grants have to be parallel to the disposable incomes of the tiers of government